October 5, 2020
SGMS Investors Careful Buying Recent Rally
Shares in Scientific Games (SGMS) have rocketed higher since hitting lows of $3.76 in March. Currently trading at $36.48, SGMS has returned all losses since the February dip and moved higher to new 52 week highs. Lets take a closer look at recent performance in SGMS.
Recent weeks have caused a rally in gaming stocks looking to capitalize in online casino and sports betting. Other stocks such as Draft Kings and Penn National Gaming followed suit printing incredible increases to their stock price. Virtual online gaming and sports betting will remain a high growth area for these companies to focus on as COVID-19 continues to attract stay at home alternatives.
But Scientific Games is primarily involved in land based gaming which has been heavily impacted by COVID-19. In the recent June 2020 quarter, SGMS posted revenue of $539M compared to $845M in the same quarter last year. This is a decrease of 36%. With many land based gaming sites operating at half capacity and barely turning a profit to shareholders it would be hard for these companies to justify investing in new gaming products which SGMS provides. As a result SGMS services revenue fell 29% and product sales fell 64%.
Even more concerning is after the company posted a negative operating income (56M), they still owed 124M for interest payments on debt during the quarter. Scientific Games still carries a significant portion of debt which currently sits at 8.7B. Debt isn’t necessarily bad if a company is able to generate more revenue while driving down costs. This doesn’t appear to be the case as revenue is contracting due to COVID-19 and operating income losses are widening.
From a technical point of view SGMS has recently begun diverging on the daily. The weakening trend of RSI could suggest buyers are becoming exhausted which may indicate a near term pull back to the stock price. This wouldn’t be surprising given SGMS rally of 30% + in mid September was attributable to an institutional change in ownership between MacAndrews & Forbes and Caledonia. The announcement appears to have renewed excitement in the stock but the question remains how long can investors remain excited in a company that is debt burdened and continuing to post big losses.
At the time of writing this article I am short SGMS.